Market downfalls at the beginning of the year have put investors on guard. The sharp decline in oil prices and questions over the Chinese economy leave their mark on the global economic outlook. BBVA Asset Management expects to see moderate growth in the global economy in 2016 but suggests caution when building portfolios due to increased risk. Diversification and hedging are necessary.
“We think the economic cycle in the U.S., and in the world, isn’t over yet,” explained Joaquín García Huerga, head of Global Strategy at BBVA Asset Management on February 2nd at the Previsión BBVA Investment Conference 2016 hosted by BBVA AM and BBVA Seguros . “Domestic consumption in the U.S. is very powerful, making up two thirds of its economy. Consumer spending is not as high as it could be. People are saving, which means the U.S. economic cycle will last longer,” he added.
García Huerga believes that China is raising questions about the evolution of the global economic cycle. “If the global economy gets worse, it will be because of China, but we don’t foresee a hard landing for the Asian giant’s economy,” he maintained. According to this expert, China is in a deleveraging process to reduce its debt and that will have implications on growth, which will be lower, but it doesn’t necessarily mean it will stop short.
Joaquín García Huerga, head of Global Strategy at BBVA Asset Management last February the 2nd, during de Previsión BBVA Investment Conference 2016 organized by BBVA Asset Management and BBVA Seguros.
"If the global economy gets worse, it will be because of China, but we don’t foresee a hard landing for the Asian giant’s economy.
Such low oil prices?
Regarding oil, the other factor that is weighing down the markets, García Huerga indicates that the problem is rooted in the fact that the global economy is not prepared for such low prices. While it’s true that cheap oil benefits importing countries, it also heightens the risk of bankruptcies in the oil industry, and the resulting impact on the banking sector from oil companies on their loan portfolio.
“We expect to see moderate growth in the global economy in 2016 with stabilized growth in the U.S. and U.K, improvements in the euro-zone and Japan and general weakness in emerging economies with controlled slowdown in China,” added Alberto Gómez-Reino, Investment Director for Pension Funds at BBVA Asset Management.
The main risks BBVA Asset Management sees in this scenario are:
- A hard landing for the Chinese economy and a severe crisis in another vulnerable emerging country;
- Increased geopolitical tensions in the Middle East;
- Increased risk in the peripheral euro-zone;
- A credit market crisis (due to maturity of the credit cycle, change of U.S. monetary policy and exposure to oil); and
- Lower prices of oil and raw materials.
Alberto Gómez-Reino, Investment Director for Pension Funds at BBVA Asset Management.
“We expect to see moderate growth in the global economy in 2016 with stabilized growth in the U.S. and U.K and improvements in the euro-zone and Japan
Where to invest in 2016
BBVA Asset Management experts review the different financial assets to see where they can find value in this context:
- Public debt: Developed countries’ (U.S., Germany, etc.) 'core' bonds offer little value.
- Corporate and high yield bonds: The credit cycle is more mature in the U.S. than in Europe. There is an upward trend in investment grade bond spreads, meaning high yield bonds have better prospects when the coupons counteract possible increases in the spread. Careful with high yield bonds from oil companies.
- Equity: Forecasts for developing countries’ stock markets are positive, but moderate. The equity markets’ cycle is well underway and valuations are not particularly cheap. The lack of short-term visibility also increases market risk. “We expect lower profit than in previous years,” Gómez-Reino indicated. He foresees greater stability than in 2015 for emerging markets, but no clear signs to buy.
- Currencies: A stronger dollar is expected.
- Raw materials: The price of oil should reach 40 dollars by the end of the year in a context of excessive supply.
- Liquidity: “In this scenario, liquidity is an asset to keep in mind. We should wait for opportunities to invest,” Joaquín García-Huerga affirmed.
"Increased risk in the economy and financial markets means we build more conservative portfolios", Alberto Gómez-Reino explained. While taking on less risk, at the beginning of the year, BBVA Asset Management decided to use financial hedgings for portfolios exposed to equities in order to counteract possible declines in this volatile market.
“We build portfolios based on four main principles: diversification, open architecture (third parties’ funds), active management and hedgings. They are essential in such a complicated year like 2016”, Alberto Gómez-Reino explained.
“In short, we are moderately positive in risk assets, but the increased risk in the economy and the markets make us adopt a cautious position,” Alberto Gómez-Reino clarified.